Compliance Blog

Hopefully everyone had a nice, safe holiday weekend.  Welcome back, we will move on to Title II of the Credit CARD Act - starting with Section 203 (mostly because it is shorter).  As a reminder, all previous posts on the Credit CARD Act can be found here.

Section 203 seems innocuous at first glance, however, if you offer credit cards with annual fees you will surely want to analyze the impact Section 203 will have on your credit card operations.

Here is Section 203 in full:

Section 127(d) of the Truth in Lending Act (15 U.S.C. 1637(d)) is amended--

(1) by striking paragraph (2);

(2) by redesignating paragraph (3) as paragraph (2); and

(3) in paragraph (1), by striking "Except as provided in paragraph (2), a card issuer" and inserting the following: "A card issuer that has changed or amended any term of the account since the last renewal that has not been previously disclosed or."

Ok, paragraph (2) of Section 127(d) will be removed as of February 22, 2010.  What impact will that have?  Here is current paragraph (2):

" (2)  SPECIAL RULE FOR CERTAIN DISCLOSURES.-- 

      (A)  IN GENERAL.--The disclosures required by this subsection may be provided-- 

        (i)  prior to posting a fee described in subsection (c)(1)(A)(ii)(I) or (c)(4)(A)(i) to the account, or 

        (ii)  with the periodic billing statement first disclosing that the fee has been posted to the account. 

      (B)  LIMITATION ON USE OF SPECIAL RULE.--Disclosures may be provided under subparagraph (A) only if-- 

        (i)  the consumer is given a 30-day period to avoid payment of the fee or to have the fee recredited to the account in any case where the consumer does not wish to continue the availability of the credit; and 

        (ii)  the consumer is permitted to use the card during such period without incurring an obligation to pay such fee."

This was a special rule for disclosing the renewal of credit cards - including the annual fee [described in subsection (c)(1)(A)(ii)(1) or (c)(4)(A)(i)].  Section 203 of the Credit CARD Act prohibits using the option after February 22, 2010.  Thus, if you current practice is to post an annual fee to a member's account and allow them 30 days to cancel the account and not pay the fee - you will need to adjust your practices going forward.

The general rule is found in Section 127(d)(1) and will be the only option available to credit unions (after February 22, 2010 when the "special rule" is removed from TILA).  Here is the general rule (which includes changes in paragraph (3) of Section 203):

"(d)  DISCLOSURE PRIOR TO RENEWAL.-- 

    (1)  IN GENERAL.--“A card issuer that has changed or amended any term of the account since the last renewal that has not been previously disclosed or” that imposes any fee described in subsection (c)(1)(A)(ii)(I) or (c)(4)(A)(i) shall transmit to a consumer at least 30 days prior to the scheduled renewal date of the consumer's credit or charge card account a clear and conspicuous disclosure of-- 

      (A)  the date by which, the month by which, or the billing period at the close of which, the account will expire if not renewed; 

      (B)  the information described in subsection (c)(1)(A) or (c)(4)(A) that would apply if the account were renewed, subject to subsection (e); and 

      (C)  the method by which the consumer may terminate continued credit availability under the account."

Remember that TILA is implemented by Regulation Z - and the Federal Reserve has regulations detailing the "general rule" and the "special rule" for renewal of credit card accounts - 12 C.F.R. 226.9(e).  The Fed will need to amend Regulation Z to reflect the removal of the "special rule" allowing delayed notice of the renewal of the credit card account (and imposition of the annual fee).

The upcoming open end changes to Regulation Z did not remove this "special rule" or "delayed notice."  Rather, Congress included this new requirement in the Credit CARD Act simply to remove the "special rule" they had placed in TILA in the past.  Sometimes, what Congress giveth - it taketh away.

If your credit union currently utilizes the "delayed notice" - you will want to make sure that you are ready for removal of the "special rule" and are compliant with the "general rule"  For information on the "general rule," see the Reg Z - 12 C.F.R. 226.9(e)(1).  In short, the general rule requires 30-days advance notice before the annual fee will be charge to the member's account and include information about how the member can terminate the credit card account without incurring the annual fee.  Note that Reg Z, 12 C.F.R. 226.9(e)(3), does allow this 30-day advance notice of the credit card renewal to be upon the periodic statement.